By Sarah Trefethen
Halfway through 2012, finding signs of an economic recovery is a matter of knowing where to look.
“It’s a tale of two cities,” said Ken McCarthy, senior economist and senior managing director for research at Cushman and Wakefield.
“On the one hand you have midtown south, with the tightest market in the city. Rents are rising, and it’s as strong as it was pre-recession. And then you’ve got a sort of flatish evnironment in midtown.”
Uncertainty at the global and national levels is holding back companies from hiring and consumers from buying, experts say. “People want to know who’s going to be in the White House next year, what that’s going to do to revenue and taxes,” said Richard Bernstein, executive vice chairman and principal at Cassidy Turley.
“People will be very interested to see what will happen fourth quarter, and the first quarter next year.”
The European debt crisis is also a cause for uncertainty among large, international companies who are worried about their performance in international markets, McCarthy said, adding that international instability may help explain the flat market in midtown, where tenants to be larger, more cautious companies with greater exposure to the outside world.
The tech-sector tenants who dominate midtown south, conversely, have a different set of concerns.
“They’re small. Most of them are just a few people at the start. They’re in growth mode and they’re less focused on the bigger global picture,” McCarthy said. “Unless it’s something that’s going to affect their company, it’s not on their radar. They’re more interested in ‘can I hire engineers?’ than what’s going to happen in Greece.”
Companies looking to consolidate into offices with more open space is a notable leasing trend that has continued this year, Bernstein said. “If you look at workplace patterns, we know that most employees don’t spend a significant portion of their day sitting at a desk. If we know that to be true, we can create smaller offices and more touchdown spades and common area spaces for these impromptu meetings and planning meetings,” he said.
“One might be sitting in a smaller space, but in the theory that the workplace today is more mobile, employers are saving space and improving the working environment with more light and air, less boundaries.”
As rents continue to recover, Bernstein predicts that the buildings that bounce back the fastest will be those best situated to accommodate this new approach to office space.
Large, flexible floor plates with lots of column-free space, plenty of air and light, and infrastructure — such as restrooms and air conditioning — that will accommodate more people per floor will be in highest demand.
“In class A spaces, the potential is there to see significant price increases in the next 12 to 18 months,” he said. “Certainly, we’ll see some price increase once the election is behind us.”
The Empire State Building, where the beauty company Coty is consolidating, is an example of a building that has the qualities tenants are looking for, as are the World Financial Center and 1WTC.
“In most cases they need a minimum floor plate size of at least 20 to 25,000 s/f, in order for a corporation to stack itself in an efficient way,” Bernstein said. “It has to have a certain size to it so one can accommodate an economy of scale.”
The success of midtown south is already driving tech companies to look elsewhere in the city for office space, McCarthy said. “They’re going to midtown, they’re going to the Penn Station area, they’re going to the Garment District, they’re going to downtown Brooklyn.”
Bernstein named lower Manhattan and the Third Avenue corridor as neighborhoods seeing an overflow from midtown south, and downplayed the role of the outer boroughs. “As long as a corporation is able to drive down costs, I see my clients trying to devise strategies to stay in Manhattan long-term,” he said.
The economy may be waiting for the outcome of November’s presidential election before picking up steam, but the winner of the election may be irrelevant.
“I think there’s too much momentum in the country,” Bernstein said. “The consumer confidence level on the commercial level is high enough that the growth will happen once people know who will be in office, and they can devise a strategy to build on.”